Raphael Thys- The proportion of self-employment and nontraditional work arrangements have not increased in the last 15 years with respect to primary employment
- There are about 15 million people in alternative work arrangements as their primary job, but as many as 30% of US adults do some informal work
- Most workers in nontraditional work arrangements earn less than one-quarter of their annual income from these sources
- The number of Americans doing electronically mediated work has tripled in the past five years, but income from this work still accounts for less than 1% of total income
- Several state legislatures and agencies have considered whether certain nontraditional workers should be employees or independent contractors, but the stance has not been consistent across all states
Introduction
This report investigates work arrangements that go beyond traditional wage and salary employment, paying particular attention to the kind of short-term work arrangements that comprise the so-called “gig economy.” Workers in these nontraditional arrangements rarely receive the same benefits as wage and salary workers, giving this issue obvious relevance for workers compensation.
Nontraditional Work Arrangements: What Are They and Why Do They Matter?
Our first task is to define exactly what kind of work we want to consider. Most people have an intuitive sense of the meaning of terms like the “gig economy” or “alternative work arrangements,” but apparently small changes in definitions can have big effects. The most basic relevant concept is self-employment. The Bureau of Labor Statistics (BLS) divides self-employed workers, who make up about 10% of US total employment, into two subcategories based on whether they have established a legal corporation. Most are unincorporated workers, the usual classification for independent contractors and freelancers across all sectors of the economy. The most common occupations for unincorporated self-employed workers include farmers, carpenters, and lawyers. Incorporated workers are typically business owners and often have employees of their own. The self-employed are an important group because this large subset of US workers traditionally falls outside the scope of workers compensation.
The BLS also defines two types of nontraditional work which it measures it in periodic survey supplements to the Current Population Survey (CPS).
- Contingent workers are those who do not expect their job to last for a long period, usually more than a year
- Alternative work arrangements include independent contractors, on-call workers, and those employed by contract firms or temp agencies
These definitions overlap with self-employment but also include some wage and salary workers. A change in the number of such workers indicates changes in the stability of the work environment.
A small but growing subset of alternative work is electronically mediated work, where workers are connected to clients or jobs through a website or app. This is sometimes called online platform work. Workers are matched to tasks and paid through the company that owns the platform. The tasks themselves can either be in-person (e.g., Uber, TaskRabbit) or online (e.g., Amazon Mechanical Turk, Upwork).
Electronically mediated work is often a go-to example of gig work because it is organized explicitly around short, nonrepeating tasks for different clients. While these workers are typically considered independent contractors, some workers and jurisdictions argue that some electronically mediated workers, especially ride-sharing drivers, should be considered employees of the interface owner. We will revisit this issue later.
Finally, some definitions of informal work include any one-time task that earns money. For instance, a Federal Reserve Board of Governors report defines informal work as including ride-sharing, property maintenance, and child care, but also selling items on eBay or at a garage sale.
From the perspective of workers compensation, what matters most is how fast nontraditional work is growing and what it is displacing. If electronically mediated work is drawing in workers who value flexibility and would otherwise work as independent contractors, then these workers would have been outside the workers compensation system anyway. But if it shifts workers from traditional wage and salary employment to the gig economy, then this will decrease payroll in the workers compensation system.
Workers compensation premium can be impacted in two ways. Most simply, firms can hire freelancers to do tasks that employees would otherwise have done. But there are also collateral impacts. For example, if home-rental sites reduce hotel demand, then payroll in hospitality services decreases even though people renting out spare rooms are not hotel employees.
In the next section, we examine a variety of measures of nontraditional work to determine how much growth there has been in recent years.
How Prevalent Are Nontraditional Work Arrangements?
There is mixed evidence about the rise in alternative work. Large surveys have found little change in self-employment and alternative work in the last 10–20 years, but administrative data (such as tax records) shows these types of work arrangements are growing. Taken together, the evidence suggests little change in the number of Americans in alternative work arrangements as their primary source of income, but increasing numbers of people engaging in alternative work arrangements to generate supplemental income.
Self-employment in the CPS has been declining slightly as a percentage of the workforce. In 2005, there were 10.5 million unincorporated self-employed workers. By 2018, the number was 9.7 million. This is a decline from 7.4% to 6.2% of the total workforce. The number of incorporated self-employed (who are arguably less like other nontraditional workers) rose slightly, but even so, the total self-employment percentage decreased.
The CPS’s Contingent Worker Supplement shows similar lack of growth for alternative and contingent workers. Alternative work arrangements and contingent workers declined from 10.7% and 1.8% of workers in 2005 to 10.1% and 1.3% in 2017. As with self-employment, the CPS shows no growth in alternative work arrangements. However, there are at least two big reasons why this may not be the whole story.
First, many people turn to nontraditional work to supplement their main job, not replace it. The Contingent Worker Supplement asks about main jobs, and this focus may dramatically understate the amount of nontraditional work being done.
Second, the intermittent and less formal nature of this work can lead to measurement error. Survey question writers and interviewers have to be careful to ensure that they elicit answers that are fully responsive. And surveys typically take a snapshot of work done in a short period of time, say, a week or a month. This can miss a lot of people who occasionally do nontraditional work, even if the survey correctly counts everyone who did such work in the reference period.
Administrative data produces results strikingly different from surveys. One recent working paper found that the prevalence of self-employment is over 50% higher when using tax records instead of CPS survey results. Almost two-thirds of those with self-employment income in tax records are not self-employed in the CPS, while about half of those who reported being self-employed in the CPS did not have self-employment taxable income.
Tax records show a different trend as well. In 2005, the IRS received about 21.5 million Schedule C filings for income from a nonfarm business or a profession practiced as a sole proprietor, and 25.5 million in 2016. This is about a 1.6% increase per year, compared to 0.7% annualized employment growth in nonfarm payroll employees over the same period. The comparison suggests that self-employment is not only growing, but growing slightly faster than wage and salary employment.
The simplest explanation for the apparent discrepancies between datasets is that a lot of alternative work is done by people to supplement their primary source of income, not replace it. A JPMorgan Chase study sheds light on this by using an even more direct measure of income than tax records—personal banking data.
This study focused on electronically mediated work.The study uses the term “online platform income,” but its definition is very similar to the BLS definition of “electronically mediated work”. It found that 4.5% of households earned some income from electronically mediated work between April 2017 and March 2018—three times higher than the percentage in the first 12 months of the study period, October 2012 to September 2013. Two-thirds of this 4.5% had no income from electronically mediated work in the past month—most people only did electronically mediated work occasionally.
This insight is borne out by electronically mediated work’s share of total income. Households earned one-fifth of their yearly income from electronically mediated work. Even restricting attention to only the months in which they did this type of work, half their income came from other sources. And, of course, the other 95% of households never earned electronically mediated income at all.
Electronically mediated work is a small subset of all alternative work, but casting wider nets finds similar patterns. The Federal Reserve report referenced in the previous section found that 30% of adults did some gig work in 2018, using its more expansive definition. But fewer than half made more than 10% of their income through these tasks, and the most common reason given for taking on gig work was to supplement income. Competing definitions produce a wide range of estimates about how many people do gig work, but they agree that these arrangements make up a small percentage of participating individuals’ total income.
What Economic Factors Favor Nontraditional Work?
There are a few major economic factors that favor nontraditional work arrangements. From an employer’s perspective, it may cost considerably less to hire an independent contractor rather than a new employee. Firms do not provide benefits, unemployment insurance, or workers compensation to contractors. The costs of associated benefits add an additional 46% to an average worker’s total compensation beyond wages and salaries. Also, hiring and separating from employees is a costlier process than providing temporary contracts.
This is not a one-way street. Workers will require higher base pay to entice them away from jobs offering these benefits, especially those considering nontraditional work arrangements as their primary source of income. But not all workers value benefits equally. As we have seen, many gig workers are using these jobs to supplement their income. These workers may be covered by health insurance or benefits at a main job or through a family member. Or they may be choosing between alternative work and part-time or unstable work that does not provide full benefits either. Even primary earners may value flexibility or potential tax savings enough to prefer independent contractor status to wage and salary employment.
Indeed, most nontraditional work is done by people who have chosen it. A McKinsey study showed that 70% of independent workers are independent by choice, rather than by inability to find a comparable wage and salary job. As long as some workers value full benefits less than those benefits’ costs to firms, there will be a market for independent contractors.
Technology has also reduced search costs for interested firms and workers to connect. In 2005, when the last Contingent Worker Supplement was released, only about one-third of Americans had home broadband Internet, and there was no such thing as an iPhone. Now, 90% of US adults have home broadband, a smartphone, or both. This change has obviously created a broader base of both potential workers and customers for electronically mediated work.
Are Nontraditional Workers Employees or Independent Contractors?
In 2019, NCCI is monitoring about 45 bills that address independent contractors and the misclassification of employees. This is not a new legislative trend. For many years, independent contractor/employee misclassification bills have been one of the top trending legislative issues for the workers compensation-related bills that we track each year.
California is one of the states considering legislation in 2019. The California Supreme Court issued a decision in 2018 (Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County) that adopted a three-part test, known as the “ABC” test, for determining whether workers are employees or independent contractors. According to the court decision, several other states around the country already apply a similar test for determining worker status. California has introduced legislation that appears to codify the test from Dynamex (AB 5). The legislation has passed the Assembly and is awaiting action in the California Senate.
Other states are also seeking clarity on the issue of independent contractor versus employee status:
- This year Arkansas enacted legislation (HB 1850, the Empower Independent Contractors Act of 2019) that codified a 20-factor test from an IRS ruling to determine whether workers are employees or independent contractors. The bill states that the test is applicable to the state workers compensation law.
- Other states such as Indiana, Missouri, and West Virginia considered, but did not pass, legislation impacting independent contractor status (IN SB 371, MO HB 1137 and SB 313, WV HB 2365 and HB 2786).
- At least two states—New Jersey and Washington—have proposed legislation to establish a system of portable benefits for certain workers (NJ AB 3824/SB 67 and WA SB 5690). Other states, including Georgia (SR 325) and New York (AB 4778/SB 2650), considered or are considering proposals to study the issue.
In addition, proposed federal legislation (S 541) would require the Secretary of Labor to establish a pilot program for providing portable benefits to eligible workers. According to the definitions in the federal legislation, portable benefits are work-related benefits, including workers compensation, that are provided to eligible workers in a manner that allows the worker to maintain the benefits upon changing jobs.
State legislatures and agencies have begun to address electronically mediated work directly, as a special case of the employee-versus-independent-contractor question. There is particular interest in the hosts of ride-sharing services, such as Uber and Lyft, which are also known as transportation network companies (TNCs).
- In 2018, nine states (AL, CA, CO, FL, GA, IA, IN, KY, TN) considered legislation that defines the term “marketplace contractor” to classify certain on-demand workers as independent contractors
- Five states, Florida (HB 7087), Indiana (HB 1286), Iowa (SF 2257), Kentucky (HB 220), and Tennessee (SB 1967), passed legislation in 2018
- Arizona passed similar legislation in 2016 (HB 2652)
- In 2017, Alaska passed legislation (HB 132) that excludes from workers compensation law a TNC driver “who provides a prearranged ride or is otherwise logged onto the digital network of a TNC company as a driver”
- In 2017, Indiana considered similar legislation (SB 464), but it did not pass
- In 2015 and 2016, respectively, Arkansas (SB 800) and West Virginia (HB 4228) passed legislation that established criteria for determining whether a TNC driver is an employee or an independent contractor
- In questions involving classification of Uber drivers, the Alaska Division of Workers’ Compensation, California Labor Commission, New York State Department of Labor, and Oregon Bureau of Labor and Industries have all previously indicated that TNC drivers are employees and not independent contractors
- In December 2015, the Florida Department of Economic Opportunity issued a final order stating that, for purposes of reemployment assistance, an Uber driver is an independent contractor and not an employee
- This decision was affirmed by the Florida Third District Court of Appeals in McGillis v. Department of Economic Opportunity
The issues around electronically mediated work have come before federal agencies and courts as well.
In April 2019, the US Department of Labor (USDOL) issued an opinion letter (FLSA 2019-6) as to whether service providers working for a certain virtual marketplace company are independent contractors or employees under the Fair Labor Standards Act. Based on the facts of the question presented, the USDOL concluded that the service providers were independent contractors.
Federal courts have not yet taken a definitive stance. In September 2018, in a case involving the classification of Uber drivers, the US Court of Appeals for the Ninth Circuit ruled that the mandatory arbitration clause in the contract between Uber and its drivers was valid and enforceable. However, the Ninth Circuit did not rule on the issue of whether Uber drivers are employees or independent contractors. In March 2019, Uber settled a class action lawsuit with over 13,000 drivers alleging they were misclassified as independent contractors. The $20 million settlement did not require Uber to reclassify drivers as employees.
While legislation and agency guidance help clarify work relationships within states, these actions may not cover all nontraditional work, and similar work arrangements may fall into different classifications (employee versus independent contractor) across states. We will continue to monitor future developments in 2019 and beyond.
Conclusions
Self-employment and alternative work arrangements have not risen much in recent years. Both are falling as a proportion of workers’ primary jobs. Electronically mediated work is growing fast, but it currently engages fewer than 5% of US workers even at the highest estimates. Studies consistently find that electronically mediated work mostly provides supplemental income and accounts for less than 1% of total income.
None of these results suggest that a significant shift away from wage and salary employment—or workers compensation coverage—is coming soon. As NCCI argued at the 2019 Annual Issues Symposium (AIS) in May, the current state of gig work is not yet a game changer.
However, two important factors will make nontraditional work an issue worthy of continued scrutiny.
The first factor is ease of entry, especially for electronically mediated work. Almost all Americans have access to online platforms, and firms are gaining clarity about how to classify such workers. The groundwork exists for continued expansion beyond current applications such as ride-sharing.
The second factor is the business cycle. The risk of workers compensation leakage is likely to rise during and after the next recession, whenever that may occur. (Electronically mediated work was in its infancy during the Great Recession.) When firms shed payroll in a future downturn and workers have difficulty finding traditional jobs, then the labor supply for nontraditional work will increase. At the same time, cost-cutting firms will have incentive to experiment. If firms and at least some workers favor new arrangements, then payroll lost in a recession is likely to shift to nontraditional work during recovery.
While we do not expect a rapid change in covered wage and salary employment, the proportion of independent work that falls outside of traditional workers compensation will likely increase in coming years.
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